IMF predicts euro slump

December 18, 2001 Posted: 1622 GMT

LONDON (CNN) -- The International Monetary Fund says the economic slump in the 12-nation euro zone could be more prolonged than expected.

The 183-nation lending agency on Tuesday released an updated World Economic Outlook report to take into account the impact of the September 11 terrorist attacks.

The new forecast sharply lowered growth estimates for the world economy below its October report, which had been prepared in advance of the terrorist attacks.

The IMF cut its growth forecast for the euro region as it ratcheted back its projections for the group's main economic drivers, France and Germany.

It now expects the euro-zone economy to grow just 1.5 percent this year compared to 1.6 percent when the last projections were made in November.

Germany, the biggest economy in Europe, was projected to grow by just 0.5 percent this year, down from the previous 0.7 percent forecast, and 0.7 percent next year.

Economic growth in France and Italy is also expected to be well below potential, according to the report. The IMF is forecasting growth in France to hit 2.1 percent this year and 1.3 percent in 2002, while Italian growth is seen weaker at 1.8 percent and 1.2 percent, respectively.

The IMF said the timing of any economic recovery in Europe was uncertain, saying indicators of business conditions have yet to show a turnaround.

But it said with inflation under control, the European Central Bank had room to ease rates if needed to boost growth and said the favourable euro exchange rate should also help underpin economic activity. 

Tax cuts in France, Germany and Italy should help boost growth but these countries have little extra room to manoeuvre on the fiscal front because of the Stability and Growth Pact, which limits fiscal deficits to 3 percent of gross domestic product.

"Other countries including Ireland, Finland, the Netherlands and Spain, appear to have greater scope for a cautious easing of fiscal policy if downward pressures prevail," the report said.

The IMF said structural reforms, particularly in labour, product and financial markets were also essential to ensure a recovery.

It warned that if economic prospects do not improve in the euro zone, there could be a further renewed weakness in stock prices.

"Such a fall would add to downward pressure on household demand and on business investment spending," the report said.

- Wire reports contributed to this report.